do supply chain management practices contribute firm

DOI: http://doi.org/10.4038/kjm.v6i2.7545

Kelaniya Journal of Management | 2017 | Vol. 06 | Issue 02 | Page 52

Do Supply Chain Management Practices Contribute Firm

Competitiveness? A Study based on Medium Scale Entrepreneurial Firms

in Sri Lanka

Wijetunge W.A.D.S.1, Ranwala R.2

Department of Commerce and Financial Management,

Faculty of Commerce and Management Studies, University of Kelaniya, Sri Lanka

[email protected], [email protected]

Abstract

It is evident that supply chain management (SCM) practices are widely practiced by large scale

and established business organizations as benchmark. Not only the large firms but also the

small and medium scale businesses are required to follow these practices to achieve the

growth. Further, present business environment is very competitive and organizations should

face this as a challenge. This study is undertaken to empirically investigate the impact of supply

chain management on competitiveness. Sample consists of 327 production managers of

medium scale entrepreneurial firms (manufacturing sector) in Colombo district. The analyzed

data supports the hypotheses revealing that higher the level of involvement in SCM practices

higher the competitiveness. Further, it is found that except level of information quality and lean

practices, other practices of SCM (Strategic partnership with suppliers, customer relationship,

level of information sharing and internal supply chain process are significant factors that affect

firm competitiveness.

Keywords: SCM practices, Competitiveness, Entrepreneurial firms

Introduction

At present ant organization is experiencing the globalization, and they are facing a huge

competition as a result of the globalization. However, organizations cannot skip this situation

and anyhow they need to be remain competitive in the market. Organization are facing lot of

challenges in making their efforts in the face of the dynamic global markets as their ultimate

objective is to grow and survive in the market (Lori, Cook & Sengupta, 2011). These market

conditions has persuaded the organizations to shift from lowest priced product, highest quality

2 http://orcid.org/0000-0002-0577- 8845



or best-performing product to the ability to respond quickly to market needs and get the right

product to the right customer at the right time (Karimi & Rafiee, 2014 as cited in Anderson &

Gerbing, 1988). Studies showed that approach of supply chain management (SCM) used

increasingly as an opportunity to achieve these goals by many organizations. Therefore,

understanding and implementation of supply chain management is a necessary condition to

remain competitive in the global competition and improving profitability (Zuckerman, 2004).

The growth of supply chain aims to improve profitability, customer response and ability to

deliver value to the customers and also to improve the interconnection and interdependence

among firms. Due to market expanding from domestic market to global market increase

customer demands, for instance demanding lower prices, faster delivery, higher quality

products or services and increase the variety of items (Braunscheidel, 2005 as cited in Sukati,

Hamid, Baharun & Huam, 2011). With the emerging focus on the SCM practices, lot of

researchers have tried to understand the relationship between SCM practices and the firm

competitiveness. Supply-chain driven organizational performance falls into three categories.

First, resource performance reflects value addition in the form of achieving efficiency. Second,

output performance reflects value addition as the firm’s ability to provide high levels of

customer service. Last, flexibility performance reflects value addition as the firm’s ability to

respond (Karimi & Rafiee, 2014 as cited in Chau, 1997).

Significance of the Study

Many of the empirical studies have investigated the SCM practices and competitiveness in

large scale organizations. Therefore, there is a dearth of studies undertaken in Sri Lankan

context focusing on small and medium scale enterprises. Further, these enterprises should be

encouraged to follow these best practices to face the competition and to achieve competitive

advantage in order to ensure their survival. Accordingly this paper intends to examine the

impact of SCM practices on firm competitiveness in Sri Lankan context with reference to the

medium scale entrepreneurial firms. Accordingly this study intents to answer following

research questions.

What is the relationship between SCM practices and competitiveness?

What is the impact of SCM practices on firm competitiveness?



Literature Review and Research Framework

SME sector in Sri Lanka

SMEs can be identified as new rescuers of industrialized economies. At present the vibrant

SME sector is identified as engine of growth playing a significant role in economic growth,

innovation, employment generation and poverty reduction (Stokes, 2003). In this context SMEs

in Asian developing countries, have a crucial role to play because of their potential

contributions in terms of employment creation, improvement of income distribution, poverty

reduction, growth of exports of manufactured products, and development of entrepreneurship,

manufacturing industry, and rural economy. Though SMEs are very critical in developing

countries since which have been considered as backbone of the economies (Prasad 2004).

According to the Task force for Small and Medium Enterprise Sector Development Programme

(2002), the SMEs are less dynamic and underdeveloped as against large enterprises in the Sri

Lankan economy. SMEs should be competitive in both domestic and global markets in order

to play a significant role in government. Therefore Sri Lankan government must take a

prominent role in facilitating, protecting and developing the SME sector to become dynamic,

robust and innovative. Dynamic SME sector allows easy entry and exist and improves

flexibility in economic activities. An innovative SME sector absorbs the new ideas and

technologies providing with a competitive advantage. According to the Annual Industrial

Survey (2014) conducted by the Department of Census and Statistics, manufacturing sector

represents 98.5% of establishments, Mining and Quarrying 1.1% and Electricity, Gas and

Water supply 0.4%. SMEs manufacturing consists of 22 sub divisions. The following Table

shows the no. of establishments, no. of. Employees and value added for each sub division.

Accordingly, the highest number of establishments are engaged in food products and

beverages, hence that division generates highest employment and value addition to the

economy. Thus it is evident that Sri Lankan SME sector plays a vital role in the economy. The

following table shows the number of establishments according to the different classes in

manufacturing sector.



Table 1: Establishments classified by persons engaged according to division – 2015

(Manufacturing Sector)

Industry division Persons engaged 50-99

Country Colombo

Food products and beverages 369 117

Tobacco products 0 0

Textiles 60 27

Wearing Apparel, dressing &dyeing of fur 58 28

Tanning and dressing of leather; manufacture of luggage, hand

bags

10 5

Wood & products of wood & cork except furniture 8 2

Paper and paper products 15 9

Publishing, printing and reproduction of recorded media 25 12

Chemicals & chemical products 1 1

Rubber & plastic products 72 36

Other non-metallic mineral products 24 12

Basic metals 14 9

Fabricated metal products except machinery equipment 24 10

Machinery & equipment 17 10

Electrical machinery and apparatus n.e.c. 16 9

Radio, TV & communication equipment and apparatus 1 1

Medical, precision & optical instruments, watches 0 0

Motor vehicles, trailers and semi-trailers 4 3

Other transport equipment 5 4

Furniture, Manufacturing of n.e.c. 48 32

Total 771 327 Source: Annual Industrial Survey, (Department of Census and Statistics 2015)

The following table shows the distribution of establishments which are having employees 50-99 of

the manufacturing sector in Western province. According to the survey data Colombo district ranked

as first in terms of no. of establishments, no of employees and the value added.

Table 2: Establishments classified by persons engaged according to industry division – 2015

(Western province - manufacturing sector)

District No. of

establishm

ents

Employees

(No.)

Value added

(Rs.)

Colombo 327 30,781 1,108,992,276

Gampaha 62 5,712 24,134,514

Kaluthara 28 2,483 2,282,113

Total 417 38,976 1,135,408,903

Source: Annual Industrial Survey, (Department of Census and Statistics 2015)


Kelaniya Journal of Management | 2017 | Vol. 06 | Issue 02 | 6

Importance of SCM practices to SMEs

The supply chain improvements described indicate that supply chain management has the potential

to improve a firm's competitiveness. Supply chain capability is as important to a company's overall

strategy as overall product strategy. Supply chain management encourages management of processes

across departments. By linking supply chain objectives to company strategy, decisions can be made

between competing demands on the supply chain. Improvements in performance are driven by

externally-based targets rather than by internal department objectives. Managing the supply chain

means managing across traditional functional areas in the company and managing interactions

external to the company with both suppliers and customers. This cross-boundary nature of

management supports incorporating supply chain goals and capabilities in the strategic plan of the

company. This focus on integration can then lead to using the supply chain to obtain a sustainable

competitive advantage over competitors (Lummus & Vokurka, 1999).

SCM Practices

Firms can no longer effectively compete in isolation of their suppliers and other entities in the supply

chain. Interest in the concept of supply chain management has steadily increased since the 1980s

when companies saw the benefits of collaborative relationships within and beyond their own

organization (Lummus & Vokurka, 1999). Different scholars have defined the term “Supply Chain

Management” and its contents.

SCM practices have been defined as a set of activities undertaken in an organization to promote

effective management of its supply chain. According to Min and Mentzer (2004) the concept of SCM

as including agreed vision and goals, information sharing, risk and award sharing, cooperation,

process integration, long-term relationship and agreed supply chain leadership. Donlon (1996) cited

in Li. et al., (2006) describes the latest evolution of SCM practices including supplier partnership,

outsourcing, cycle time compression, continuous process flow, and information technology sharing.

On the other hand SCM practices includes the following areas namely; supply chain integration,

information sharing, supply chain characteristics, customer service management, geographical

proximity and JIT capability (Zhao & Lee 2009, Li, B. Ragu-Nathan, S. Ragu-Nathan & Rao, 2006).

According to above definitions it can be concluded that SCM as a multi-dimensional concept.

However, for the purpose of this study Strategic Partnerships with Suppliers, Level of Information

Sharing, Quality of Information Sharing, Customer Relationship and the internal lean practices.



Strategic Partnerships with Suppliers

Strategic partnerships with suppliers are organized efforts to create and maintain of a network of

qualified suppliers. This effort includes all activities that are needed to improve the current

performance of suppliers. Strategic partnership emphasizes direct relationship and long-term and

encourages mutual planning and efforts to resolve problem. Supplier organizations can work together

more closely and eliminate useless time and effort (Li et al., 2006).

Level of Information Sharing

Information sharing refers to ability of enterprises to share knowledge and information with supply

chain partners with effective and efficient manner. Information sharing in interactive system of

supply chain includes information between direct partners and all network of supply chain. Therefore,

sharing of information is needed for efficient and effective interaction among partners (Rahman &

Afsar, 2008). Level (quantity aspect) of information sharing refers to the extent to which critical and

proprietary information is communicated to one’s supply chain partner (Li et al., 2006). Further,

through collecting the information available and sharing it with other parties within the supply chain,

information can be used as a source of competitive advantage (Monczka et al., 1998).

Quality of Information Sharing

Chau (1997) Highlights the both quality and quantity of the information is necessary when

communicating among suppliers. Further it is important to share the quality information about the

markets to suppliers where the decisions are taken based on the collected market information. Sharing

Information between members of the supply chain should be from reliable source and updated,

accurate, timely and credible exchange (Li et al., 2006). However, organizations are reluctant to

disclose the valuable information to outsiders. The real benefit of information can be ensured as long

as it is passed to the parties in the supply chain. Therefore, ensuring the quality and he quantity of

information sharing has become critical in SCM practices (Feldmann & Müller, 2003).

Customer Relationship

Comprises the entire array of practices that are employed for the purpose of managing customer

complaints, building long-term relationships with customers, and improving customer satisfaction

(Tan et al., 1998). Further, they consider customer relationship management as an important

component of SCM practices. Having understood the importance of customer relationship towards

the longterm survival organizations are moving towards the customized products and the

personalized services (Wines, 1996).



Internal Supply Chain Process (Postponement)

Postponement is defined as the practice of moving forward one or more operations or activities

(making, sourcing and delivering) to a much later point in the supply chain (johnson & davis,1998)

cited in Li et.al (2006). Postponement allows an organization to be flexible in developing different

versions of the product in order to meet changing customer needs, and to differentiate a product or

to modify a demand function (Waller, Dabholkar & Gentry 2000).

Lean practices

It is the process of removing all of the wasted time and resources in the production process. Lean can

be considered a philosophy, a work culture, a technique, a management concept, a value, a

methodology or an ethos (Mark, Wilson & Ram, 2009). Today, lean is evolving into a management

approach that improves all the processes at each level of an organization. Lean practices help to

eliminate waste in all procurement cycles, prevent shortages, reduce inventory investment, reduce

procurement lead time and cost, increase inventory turnover and ensure customers satisfaction.

(Lewis, 2000).

Competitiveness

Competitiveness is the ability to provide products and services as or more effectively and efficiently

than the relevant competitors. Similar idea is also explained by competitive advantage (Cox & Blake

1991). Competitive advantage is one factor that an organization is able to create a state of defense

against competitors and includes a feature that allows an organization to distinguish itself from its

competitors (Li et.al, 2006). Competitive advantage is related with the unique resources and the

competencies, where other competitors do not have, which leads better performance over the

competitors (Sadri & Lees, 2001). Competitive advantage is based on the competitive capabilitiesand

the past literature suggests price/cost, quality, delivery, and flexibility as important. The recent

literature identifies time is also an important source of Competitive advantage (Kessler & Chakrabarti

1996). According to Koufteros et al., (1997) cited in Li et al., (2006) competitive advantage is based

on the following capabilities; competitive pricing, premium pricing, value-to-customer quality,

dependable delivery, and production innovation. It appears that CA should be achieved through both

internal and external sources. Therefore, for this study price/cost, quality, delivery dependability,

product innovation, and time to market has been selected.



Relationship among SCM practices, Performance and Competitiveness

Many of the previous research studies have empirically examined the relationship between SCM

practices and organizational performance. A study done by Kenyanchu, Margaret and Okibo (2014)

concluded that supplier relationships, information sharing and decentralized procurement have an

impact on operational performance in public health institutions in Kenya. Karimi and Rafiee (2014)

conclude that higher the SCM practices higher the performance. However, postponement is not a

strong predictor of performance. Ghatebi, Ramezani, and Shiraz, (2013) found that there is a

relationship between five dimensions of SCM (strategic relationships with suppliers, customer

relationship, level of information sharing, quality of information systems and internal lean practices)

and competitive advantage in manufacturing companies of Khuzestan Province. The positive

relationship between three dimensions of SCM and competitive advantage was further confirmed by

Sukati, Hamid, Baharun and Huam (2011).

However, this paper extends SCM practices to six dimensions to have an overall insight toward SCM

practices and examine the impact of each dimension on competitiveness. Accordingly following

hypotheses can be derived for testing.

H1: there is a positive relationship between SCM practices and firm competitiveness

H2: there is a positive relationship between supply chain responsiveness and firm competitiveness

The following conceptual model has been developed through the previous literature.

Figure 1: Research framework

According to the above framework, SCM practices represents the independent variable (IV) and

competitiveness represents the dependent variable (DV).The above research framework suggests the

following research hypotheses.

SCM practices (IV)

Strategic Partnerships with Suppliers

Level of Information Sharing

Quality of Information Sharing

Customer relationship

Internal Supply Chain Process (Postponement)

Lean Practices

Competitiveness (DV)

Price/cost

Quality

Delivery dependability

Product innovations

Time to market.



Research Method

This study applies the deductive approach in arriving at the research problem and the research

framework. This is an empirical study based on the medium scale entrepreneurial firms in

manufacturing sector in Colombo district, Sri Lanka. Colombo district ranked as the first in terms of

no. of establishments and the no. of persons engaged. Therefore, the Colombo district has been

selected as the population for the study and the sample consists of 327 establishments covering all

22 sub-sectors in manufacturing sector. (Table no 1). For the purpose of this study a medium scale

entrepreneurial firm is defined as no. of employees more than 50 and less than 99.List of SMEs was

obtained from the Department of Census and Statistics as at the end of 2015, which satisfies the

above criteria. A self – administered structured questionnaire was distributed for the production

managers in327firms in Colombo district. Only 221 questionnaires were returned and of which 215

were usable for the analysis of data.The questionnaire consists of four parts; 1. general information,

2. SCM practices and3. competitive advantage and measured using five-point likert scale (1= strongly

disagree, 2 = disagree, 3 = neutral, 4 = agree, 5= strongly agree). Instrument that measures SCM

practices were developed by Li et al., (2006). Instruments that measure competitive advantage were

adopted from Zhang (2001) cited in Li et al., (2006).

Testing for validity and reliability

Factor analysis was conducted for the SCM practicesand Competitive Advantage using principal

component method (factor extraction with Varimax rotation). The results show that Kaiser-Meyer-

Olkin (KMO) measure of sample adequacy is greater than 0.5 and the significance values of Bartlett's

Test of Sphericity equal to 0.000. This indicates that the items were interrelated and shared common

factors. The following table shows the results of factor analysis. There are six SCM practices;

Strategic supplier partnership (SSP), Customer relationship (CR), Level of information sharing (LIS),

Level of information sharing (LIS), Level of information quality (LIQ), Internal Supply Chain

Process (Postponement)(ISC) and Lean practices (LP).

Table 3:Factor analysis: Factor loading SCM practices

SSP CR LIS LIQ ISC LP

We consider quality as our number one criterion

in selecting suppliers.

0.675

We regularly solve problems jointly with our

suppliers.

0.342

We have helped our suppliers to improve their

product quality.

0.433

We have continuous improvement programs that

include our key suppliers.

0.567



We include our key suppliers in our planning and

goal-setting activities

0.752

We frequently interact with customers to set

reliability, responsiveness, and other standards for

us.

0.677

We frequently measure and evaluate customer

satisfaction.

0.716

We frequently determine future customer

expectations

0.668

We facilitate customers’ ability to seek assistance

from us.

0.489

We periodically evaluate the importance of our

relationship with our customers.

0.601

We inform trading partners in advance of

changing needs.

0.654

Our trading partners share proprietary information

with us.

0.780

Our trading partners keep us fully informed about

issues that affect our business.

0.661

Our trading partners share business knowledge of

core business processes with us.

0.443

We and our trading partners exchange

information that helps establishment of business

planning

0.501

Information exchange between our trading

partners and us is timely.

0.834


partners and us is accurate.

0.734


partners and us is complete.

0.793


partners and us is adequate.

0.571


partners and us is reliable

0.559

Our products are designed for modular

assembly...

0.437

We delay final product assembly activities until

customer orders have actually been received

0.732

We delay final product assembly activities until

the last possible position (or nearest to customers)

in the supply chain

0.730

Firms delayering, downsizing and outsourcing 0.546

Firm does not rely on inspecting products

procured

0.567

Firms buy products in small batches only when

they are needed

0.761

KMO (Kaiser-Meyer-Olkin) value 0.685 0.751 0.701 .589 0.624 0.756

Bartlett's Test of Sphericity (Sig.) 0.000 0.000 0.000 0.000 0.000 0.000

Source: Author compiled data



The following table shows the results of factor analysis conducted for competitive advantage which

consists of five dimensions; price/cost, quality, delivery dependability, product innovations and time

to market.

Table 4: Factor analysis: Factor loading competitive advantage

P/C QL DD PI TM

We offer competitive prices. 0.673

We are able to offer prices as low or lower

than our competitors

0.557

We are able to compete based on quality. 0.775

We offer products that are highly reliable. 0.568

We offer products that are very durable 0.790

We deliver the kind of products needed. 0.569

We deliver customer order on time. 0.569

We provide dependable delivery 0.423

We provide customized products. 0.845

We alter our product offerings to meet client

needs.

0.778

We respond well to customer demand for

“new” features.

0.666

We deliver product to market quickly. 0.538

We are first in the market in introducing new

products.

0.578

KMO (Kaiser-Meyer-Olkin) value 0.711 0.729 0.592 0.651 0.613

Bartlett's Test of Sphericity (Sig.) 0.000 0.000 0.000 0.000 0.000

Source: Author compiled data

The frequently used reliability statistic is Cronbach’s alpha which measures the internal consistency

among indicators. Higher the Cronbach’s alpha values indicate the higher internal consistency of the

items in the scale (Sekaran 2003). According to the following table Conbach’s alpha values for the

main constructs are greater than 0.7, which shows a high reliability of the data.

Table 5: Reliability Statistics

Dimension Conbach’s

alpha

Supplychain Management

Practices

0.782

Competitiveness 0.731 Source: Author compiled data



Results of the model and analysis of data

In general, bivariate and multivariate statistical methods have to be adhered to the statistical

assumptions such as normality, linearity, multicollinearity and homoscedasticity. Therefore the

researcher conducted the Exploratory Data Analysis (EDA) to test the data for the required statistical

assumptions using recommended techniques. SCM practices, supply chain responsiveness and

competitive advantage have been tested for normality. Further the linear relationship among the

independent and dependent variables were tested using correlation analysis (Table 6).

Multicollinearity to assert the independency of each predictor variables in the model and it was done

through tolerance and Variance Inflation Factor (VIF) values. Tolerance is the percentage of variables

in a variable not associated with other variables and it ranges from zero to one. A value near one

indicates independence and closer to zero indicates a problem of multicollinearity. VIF values should

be less than 10 as a rule of thumb to affirm the non-violation of the assumption (Hair et al., 2009).As

shown by the Table 8, tolerance values of all independent variables are closer to one and the VIF

values are less than 10. Therefore there is no serious multicollinearity between independent variables.

Association between SCM practices and Firm competitiveness

Pearson correlation was used to examine whether there is a relationship between SCM practices and

competitiveness.

Table 6 :Correlation between SCM practices and Competitive advantage

SCM SSP CR LIS LIQ ISC LP CA

CA Pearson

Correla

tion

.657

.558 .508 .447 .487 .631 .644 1

Sig. (2-

tailed) 0.002* .031* .014* .011* .007* .010* .012*

N 215 215 215 215 215 215 215

*. Correlation is significant at the 0.05 level (2-tailed).

Source: author compiled data

According to the above results, p – values for all the SCM practices are less than 0.05. Therefore,

alternative hypothesis can be accepted at 0.05 level of confidence. This indicates that there is a

positive relationship between each SCM practice and the competitiveness. Further, Internal supply

chain process and the lean practices show a highest correlation value, strategic supplier partnership

and customer relationship show a moderate association. However, the nature of association is not

strong enough with respect of any one of these SCM practices.



Impact of SCM practices on Firm competitiveness

Subsequently the multiple regression was carried out to examine the impact of each SCM practice

on competitive advantage. R square of the regression analysis is .528 which represents the model

explains 52.8% of the variance in dependent variable, competitive advantage.

Table 7: Model Summary

Mode

l

R R Square Adjusted R

Square

Std. Error of

the Estimate

1 .558a .528 .419 1.47426

a. Predictors: (Constant), LP, ISC, LIS, SSP, CR, LIQ


Table no.8 shows the beta coefficients of the multiple regression. The level of information quality

(LIQ) (0.64, p>.05) and Lean practices (LP) (0.55, p>0.05) other practices are significant predictors

of Competitive advantage (p<0.05). It shows that strategic partnerships with suppliers (SSP), level

of information sharing (LIS), customer relationship (CR) and internal supply chain process (ISC)

(postponement) are significant predictors of competitive advantage. The relative strength of each

predictor is shown by beta values of the model. Out of the significant predictors, strategic

partnerships with suppliers, internal supply chain process and customer relationship are having higher

effect on firm competitiveness.

Table 8: Multiple regression analysis between SCM practices and

Competitive advantage

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig. Collinearity

Statistics

B Std.

Error

Beta Tolera

nce

VIF

1 (Constant) 12.837 3.816 3.364 .002

SSP -.029 .513 .508 -.057 .000 .864 1.157

CR .098 .481 .430 .203 .012 .856 1.169

LIS .463 .553 .216 .838 .006 .951 1.051

LIQ -.242 .417 .095 -.581 .064 .884 1.461

ISC .643 .373 .468 1.721 .001 .751 1.331

LP .731 .390 .271 1.874 .055 .872 1.147

a. Dependent Variable: CA




Discussion and Conclusion

This study attempts to find out the association between different SCM practices and the firm

competitiveness in medium scale entrepreneurial firms in Sri Lanka. The findings of the study show

that there is positive relationship between SCM practices and the firm competitiveness and the

strength of the relationship is not much stronger. On the other hand, strategic partnerships with

suppliers, internal supply chain process and customer relationship have been identified as the

significant predictors of firm competitiveness. And also, these findings support the findings of the

previous studies ass there is not significant disagreements.

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